Radiant Consulting

Indian investors could barely shrug off their weekend slumber on Monday 24th August 2015 when within moments their investments shrunk by over USD 100 billion in no time. Oil meltdown, China shock and Fed sitting on the fence sends stock market crashing across the globe with China's Shanghai Composite leading the pack with downward spiraling by 8.87% (298 points) to 3210, India's Sensex tumbling 6.12% (1625 points) to 25742 and France's CAC40 shrinking by 5.49% (248 points) to 4383. Other leading global indices followed suit with Germany's DAX losing 4.82% (476 points) to 9648, UK's FTSE 100 down by 4.78% (289 points) to 5899, Japan's Nikkei 225 shrinking by 4.72% (895 points) to 18541, US's DJIA going down by 3.64% (588 points) to 15871 and Brazil's Bovespa hammered down by 3.07% (1384 points) to 44336. Investors just witnessed a major correction of their investments, a correction not seen in the last five years or so.

A major correction did I mention ? Have I gone insane ? If in India alone investors have lost over USD 100 billion in a day's work, the global investor community lost few trillion dollars of their investments and I term it as a major correction ? Precisely, yes. Though the fall in the stock market was substantial, it is nothing as compared to other major debacles the investor community has seen globally in the past. The Great Depression of early twentieth century, the Global Financial Crisis of 2008, the original Black Monday of 1987, the Russian Crisis in late twentieth century or even the South East Asian Crisis in 1987 was far more damaging than the Return of the Black Monday on 24th August 2015. The Chinese stock market had shed over 40% of their value in the last couple of months, crude oil has lost 25% of its value in 2015 and Fed has been constantly threatening the world with a rate hike since the past few months. However, there was something more than just meeting the eye in the spectacular fall of the markets.

Majority of large economy stock markets in the red in 2015

The widespread volatility in the Chinese stock markets has been a cause of worry for the investors this year, so has been the worrisome volatility for some other global equity markets like Russia, Indonesia, France and Germany. Overall, majority of the large economy stock markets has been in the red in 2015 led by US, India, China, UK and Brazil with Indonesia, the latest entrant to the large economy club leading by a drop of over 15% during the first eight months of the present year. Japan has been a relatively stable market with Nikkei 225 clocking a modest 5% rise during the first eight months of the year. China has seen a meteoric rise in its stock market this year with a 60% rise in four months after witnessing a sharp drop of 10% in the first month of the year. Speculations are rife that a lot of state funds has found its way into the stock market and after propping up the market, the state wanted to pull out its money which led to the sharp fall of over 40% in the last two months. High speculative and leveraged trades has added to the woes of the Chinese stock market.

USD maintains its dominance in 2015 being the numeraire currency

2015 has witnessed the dominance of a single economy in the foreign exchange market which is US. Even the seemingly stronger EUR as in the previous year has shed around 8% of its value in the first eight months of the year compared to USD. GBP has been relatively stable compared to USD though slipping a bit during the year. However, the heartbreak in the market has been caused by the widespread volatility of the USDRBL which had depreciated by over 20% during the course of the year even though showing a temporary appreciation of around 15% in May 2015. The INR has been steadily declining against the USD this year and has already lost over 5% in value this year so far. Another major emerging market currency, the IDR has lost over 15% against the USD in the first eight months of the year. It has been generally a one way downhill journey for the BRL this year as it has shed over 40% of its value as against the USD during the year so far. An interesting aspect has been a 3% devaluation of the CNY against the USD last month (which was pegged to the USD before the devaluation this year) to keep Chinese exports competitive.

Yields firm for majority of the BRICS nations

Yields have been firm for a majority of the BRICS nation though interest rate levels in the developed world has been rather benign. Brazil's credit worthiness is quite worrisome as the 10Y sovereign yield has moved up to 15% presently and there is considerable volatility in the Russian 10Y which had climbed up to 16% levels before settling down at a much more respectable 12% levels. China and India's interest rate levels have been very stable this year as the respective countries sovereign 10Y paper yielded less than 4% and less than 8% levels respectively. Some volatility is witnessed in the Indonesian sovereign yield which ultimately settled at 95 levels now. US and UK's sovereign 10Y yield has hovered around the 2% level during the year followed by other developed European nations of France and Germany whose sovereign 10Y yields have been hovering around the 1% level but showing considerable volatility. High interest rate volatility in European markets has necessitated the extension of stimulus by the European Central Bank. Japan perennially has been moving towards deflation as it's huge Government debt to GDP ratio cannot afford any hardening of yields.

Crude oil continues its woes of hitting a dithering demand globally leading to a fall in prices to the tune of 25% during the first eight months of this year itself in the backdrop of continuation of the falling prices since last year. Volatility in crude oil prices this year has been unnerving even to the most seasoned investors in the market as crude oil prices had dropped sharply by around 20% in the first fortnight of the year only to see an upward movement of prices by 50% in the next four months of the year. The last three months witnessed a southwards spiraling of crude oil prices by over 40% to settle around USD 40 per barrel for Brent Crude. Bullion prices on the other hand has been relatively steady during the year with prices of gold and silver dipping by 3% and 6% respectively during the first eight months of the year on the back drop of lower demand for jewelry from countries like China and India, two of the world's largest users of bullion. Increased demand for gold from European countries this year has tempered the fall in gold prices to a large extent.

Sluggish single digit growth in emerging market economies as well in 2015; Higher inflation still prevailing in emerging economies, plays havoc in Russia

Gross Domestic Product (GDP) witnessed sluggish single digit growth in emerging market economies as well in 2015 with the highest growth of 7% witnessed in China and India followed by around 5% growth seen in Indonesia. A robust 3% growth has been observed in developed economies of UK and US followed by over 1% growth in the European countries of Germany and France. However, Europe's woes are still far from over as the entire Euro zone seems to be suffering from a creeping growth on the backdrop of poor production. Substantial volatility seen in Japan's GDP growth numbers as the nation barely pushing itself out of negative territory. Worrisome fact is the contraction of the economies of two major countries of the BRIC nations, Brazil and Russia whose GDP shrunk by nearly 3% and 5% respectively on the aftermath of poor production and increased inflation. Inflation in Russia is hovering around the 16% mark while Brazil's inflation is threatening to break-free the single digit barrier presently. For the first time in many years India's inflation dips below 4% mark and China also controlling its inflation to a sub 2% mark which might be a worry for the economical powerhouse as its growth also gets tapered alongside. Recent spurt in some vegetable prices seems to be as a result of political issues as a lot of election funding in India is still being managed through such routes. Inflation among developed economies of US, UK, France, Germany and Japan remain benign.

Negative Industrial Production for Brazil and Russia, sluggish in developed nations; Half of the largest economies in contraction mode

Brazil and Russia witnessed faltering industrial production during the year with Brazil's industrial production dipping by around 9% this year followed by a dip of around 5% in Russia's industrial production. China and Indonesia. on the other hand, witnessed a robust industrial production numbers of 6% this year followed by a reasonable performance of India's industrial production numbers of around 4%. Substantial volatility of the industrial production numbers have been witnessed in the developed nations of UK, France, US, Germany and Japan which has witnessed sluggish growth in 2015 and presently within a range of 0 to 2%. China's Purchasing Managers Index (PMI) data for 2015 seems to be quite intriguing for the analysts which has led to the crash of the stock markets on Black Monday as the latest PMI of lower than 47.5 for China has confirmed the contraction mode of the Chinese economy and casts doubt on the reported GDP numbers of 7% for China. Other major economies in the contraction zone are those of Brazil, Russia and France. US PMI shows a substantial fall during the last one year which is a major cause of concern for the global economy.

Population explosion in the making ?

More than 2/3rd of the population of the largest economies of the world is still concentrated in China and India. Average population growth for the largest economies of the world is pegged at 0.76% in 2015. Except Japan, all of the largest economies of the world have positive population growth in 2015. The Muslim population growth globally is quite worrisome as the Muslim population growth is pegged at 1.7% as compared to the non-Muslim population growth of 0.9%. This is quite worrisome since major terrorist organizations of the world like ISIS, Al Qaeda, Boko Haram, Taliban, Hamas, etc. has attracted quite a lot of people believing in this religion which has led to other major issues like money laundering in the world. Unusually high unemployment rate is seen in Europe in 2015 with France unemployment breaching the double digit mark. Brazil, Indonesia, UK, Russia and US have all witnessed more than 5% unemployment rate this year. Unemployment rate in India presently is pegged at 4.9% but in India more than the problem of unemployment, the problem of under-employment.

Japan getting into a debt trap ?

Contraction of money supply in majority of the largest economies with a volatile and a negative money supply growth for UK is seen in recent times. Money Supply growth for France, Japan, Germany and US also have been far from encouraging. Other large economies like India, China, Indonesia, Brazil and Russia has seen more than double digit growth in money supply. The latest forex reserves data also shows that except India, forex reserves are slipping for all major emerging market economies of the world. Latest balance of trade figures shows that half of the largest economies are in the negative zone with France with over negative USD 45 Bn and US over negative USD 40 Bn leading the pack. UK and Brazil are having an alarming over negative 4% Current Account to GDP ratio in 2015 and the most pertinent question to ask at this juncture is whether Japan is getting into a debt trap with a whopping 225% Government debt to GDP ratio. Conditions are not very healthy for the US either with over 100% Government debt to GDP ratio. Global construction activity is also in the negative zone in 2015 with India marginally better due to its infrastructure push.

The global economy presently is poised at a critical juncture such that any miscalculated steps taken by the powers to be in these economies might deal a death knell to the health of the global economy. Thus, Fed should weigh all options before initiating any rate hike this month or even this year as it might lead to a catastrophe in the global markets with much greater ramifications than what was observed in the Black Monday as not only stock markets globally would tumble like nine pins, all major global currencies are expected to fall against the USD and credit spreads across the global markets shooting up considerably. It's time we take cognitive steps to prevent such massive calamity in the financial markets in the near future.

Please tune in for more blogs in future

If you are interested in getting such blogs or reports in a customized way for your corporate communications please get in touch with us on info@radiantconsulting.co.in